Tag Archives: tax treaty tiebreaker

So, you have received bank letter asking about your tax residence for CRS or FATCA – A @taxresidency primer

Prologue: In the 21st Century, The Most Interesting Thing About A Person Is His/Her Tax Residency

Introduction – So, what’s this “tax residence” stuff about? What does “tax residence” mean?

In 2014, as people started to receive “FATCA letters” I wrote a lengthy post describing “What to do if you receive a FATCA letter“. Information exchange under the Common Reporting Standard “CRS” has begun in 2018. As a result, I am writing this post which is to explain what the CRS is and how it relates to the FATCA letter. It is important to understand that the “CRS letter is actually a combined “CRS/FATCA” letter which is more likely to be received than the original FATCA letter. I urge that those who have received a letter of this type to read this post PRIOR to seeking professional advice!!!

You are reading this post because you have received a letter from your bank that is asking you to identify the countries where you are a “tax resident” and/or whether you are a “U.S. Person”.

The purpose of this post is to help you understand:

– why you are receiving the letter
– what the letter means
– what is the meaning of “tax resident”, “tax residence” and “tax residency” (terms which are used interchangeably)
– why “tax residency” is important to you
– the significance of being a U.S. citizen or Green Card holder
– how to identify where you may be a “tax resident”

Why are you receiving this letter?

The letter is intended to fulfill the bank’s due diligence obligations under both the OECD Common Reporting Standard (all countries of “tax residence” except the United States) and FATCA (whether you are a “tax resident” of the United States).

In other words, the letter is for the purpose of satisfying bank “due diligence” under two separate reporting regimes – FATCA and the OECD Common Reporting Standard “CRS”

This is long post which is broken into the following parts:

Part A – How does FATCA differ from the “CRS”?

Part B – The Combined FATCA/CRS Letter

Part C – “Tax Residency 101”: It’s about where you should be paying your taxes

Part D – Different definitions of “tax residence” – Not all countries define “tax residence” in the same way

Part E – Oh My God! I think I might be a “tax resident” of two countries – What is a “tax treaty tie breaker”? How does a “tax treaty” tie breaker work?

Part F – A “U.S. citizen” cannot use a “tax treaty tie breaker” to break U.S. “tax residence”. How then does a “U.S. citizen” cease to be a “U.S. tax resident”?

Part G – How a “permanent resident” of the U.S. – AKA “Green Card Holder” – ceases to be a U.S. tax resident

Part H – Are you, or have you ever been a U.S. citizen or Green card holder? Sometimes it’s not what it seems.

Part I – “Relinquishments of U.S. citizenship and loss of U.S. citizenship for tax purposes

Part J – Beware! You don’t sever “Tax Residency” From Canada or the United States without being subject to massive “Exit/Departure Taxes!” – You may have to buy your freedom!

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"Non-citizenship" has its privileges: An overlooked reason why a Green Card holder may NOT want to become a U.S. citizen


U.S. Tax Residency – The “Readers Digest” Version
Last week I participated in a “panel discussion” titled:
“Tax Residency In A World Of Global Mobility: What Tax Residency Means, How To Sever It, The Role Of Tax Treaties and When Exit Taxes May Apply”
The panel included a discussion of  the “pre-immigration planning” that should be undertaken prior to becoming a “tax resident of the United States”. U.S. citizens and U.S. residents are “tax residents” of the United States and (from an income tax perspective) are taxable on their world wide income. (There are separate “tax residency” rules for the U.S. Estate and Gift Tax Regime.) For the purposes of “income taxation”, the definition of “U.S. resident” includes “Green Card holders” , who by definition are “permanent residents” of the United States. Those who come to America and get that “Green Card” have subjected themselves to the U.S. “worldwide taxation” regime. Note that a Green Card holder who becomes a “long term” resident of the United States has also subjected himself to the S. 877A Expatriation Tax Regime! In other words, a Green Card holder may NOT be able to move from American without subjecting himself to a significant confiscation of his wealth! To put it simply: If a prospective immigrant is “well advised”, the S. 877A Exit Tax rules will provide a strong reason to NOT become a “permanent resident” of the United States. But, remember:
The S. 877A Exit Tax rules apply to “permanent residents” who become “long term residents”.
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The teaching of Topsnik 2 – 2016: #Greencard expatriation and the S. 877A "Exit Tax"

What! You want to abandon your Green Card and leave the USA!


Introduction – Introducing Gerd Topsnik – The World According to Facebook

“This case will be seen as the first of an (eventual) series of cases that determine how the definition of “long term resident” applies to Green Card holders. The case makes clear that if one does NOT meet the treaty definition of “resident” in the second country, that one
cannot use that treaty to defeat the “long term resident” test. A subsequent case is sure to expand on this issue. Otherwise, the case confirms that the S. 877A Exit Tax rules are “alive and well” and that the “5 year certification” test must be met to avoid “non-covered status”
Topsnik may or may not be a “bad guy”. But even “bad guys” are entitled to have the law properly applied to their facts. It would be very interesting to know how the court would have responded if Topsnik had been paying tax (a nice taxpayer) in Germany as a German resident.”

A nice summary of Topnik 1 and Topsnik 2


This is part of a series of posts on: (1) “tax residency“, (2) the use of “treaty tiebreakers” when an individual is a “tax resident” of more than one jurisdiction and (3) how to use “treaty tiebreakers” to end “tax residency” in an undesirable tax jurisdiction.
This is the second of the two Topsnik posts.
Topsnik 1 focused on the “tax residence” of Green Card Holders. The decision in Topsnik 1 is here:
topsnikdiv.halpern.TC.WPD
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The teaching of Topsnik 1 – 2014: Taxation for #GreenCard @TaxResidency and "tax treaty tiebreakers"

Introduction
This is part of a series of posts on: (1) “tax residency“, (2) the use of “treaty tiebreakers” when an individual is a “tax resident” of more than one jurisdiction and (3) how to use “treaty tiebreakers” to end “tax residency” in an undesirable tax jurisdiction.
Topsnik 1: It’s about the taxation (not expatriation) of  Green Card Holders
The 2014 decision in Topsnik is an interesting example of how these components interact. Mr. Topsnik was given a Green Card in 1977. He moved from the United States in 2003 and did NOT formally abandon his Green Card. He then attempted to argue that because he was a “tax resident” of Germany that he could use a “treaty tie breaker” to argue that he was NOT a “U.S tax resident”.
In summary the court ruled on a number of questions which INCLUDED:
1. Was Mr. Topsnik a U.S. “tax resident”?
Because Mr Topsnik never formally abandoned his Green Card (as required by the regulations) that he WAS a “U.S. tax resident” for ALL relevant years. This meant that he was taxable in the United States on all of his world income.
For clarity the regulations to Internal Revenue Code 7701(b) specifically state:

(b)Lawful permanent resident –
(1)Green card test. An alien is a resident alien with respect to a calendar year if the individual is a lawful permanent resident at any time during the calendar year. A lawful permanent resident is an individual who has been lawfully granted the privilege of residing permanently in the United States as an immigrant in accordance with the immigration laws. Resident status is deemed to continue unless it is rescinded or administratively or judicially determined to have been abandoned.
(2)Rescission of resident status. Resident status is considered to be rescinded if a final administrative or judicial order of exclusion or deportation is issued regarding the alien individual. For purposes of this paragraph, the term “final judicial order” means an order that is no longer subject to appeal to a higher court of competent jurisdiction.
(3)Administrative or judicial determination of abandonment of resident status. An administrative or judicial determination of abandonment of resident status may be initiated by the alien individual, the Immigration and Naturalization Service (INS), or a consular officer. If the alien initiates this determination, resident status is considered to be abandoned when the individual’s application for abandonment (INS Form I-407) or a letter stating the alien’s intent to abandon his or her resident status, with the Alien Registration Receipt Card (INS Form I-151 or Form I-551) enclosed, is filed with the INS or a consular officer. If INS replaces any of the form numbers referred to in this paragraph or § 301.7701(b)-2(f), refer to the comparable INS replacement form number. For purposes of this paragraph, an alien individual shall be considered to have filed a letter stating the intent to abandon resident status with the INS or a consular office if such letter is sent by certified mail, return receipt requested (or a foreign country’s equivalent thereof). A copy of the letter, along with proof that the letter was mailed and received, should be retained by the alien individual. If the INS or a consular officer initiates this determination, resident status will be considered to be abandoned upon the issuance of a final administrative order of abandonment. If an individual is granted an appeal to a federal court of competent jurisdiction, a final judicial order is required.

Green Card holders must understand that they do NOT end their status as “U.S. tax residents” by leaving the United States and taking up residence in another country! Specific steps (related to notification) are required.
2. Could Mr. Topsnik use the “treaty tiebreaker” to argue that he was a “tax resident” of Germany and NOT a “tax resident” of the United States?
No. The use of a “treaty tiebreaker” requires that an individual be a “tax resident” of both countries. In this case the “treaty tie breaker” could be used ONLY if Mr. Topsnik was a “tax resident” of both Germany and the United States. The court held that Mr. Topsnik was NOT a “tax resident” of Germany but was a “tax resident” of the United States.
Note that the fact that Mr. Topsnik was NOT a “tax resident” of Germany meant that he was NOT eligible to use the “tax treaty tie breaker” rules. Eligibility to use the “tax treaty tie breaker” rules would NOT guarantee that Mr. Topsnik would be a “German tax resident”.
Conclusion: Mr. Topsnik was ONLY a “U.S. tax resident” and was therefore taxable in the United States on his world income!
Moral of the story: If a Green Card Holder ceases to reside in the United States he as NOT ended his status as a U.S. “tax resident”.
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Green card holders: the "tax treaty tiebreaker" and eligibility for Streamlined Offshore

Before you read this post!! Warning!! Warning!!
Before a “Green Card” holder uses the “Treaty Tiebreaker” provision of a U.S. Tax Treaty, he/she must consider what is the effect of using the “Treaty Tiebreaker” on:
A. His/her immigration status under Title 8 (will he/she risk losing the Green Card?)
B. His/her status under Title 26 (will he expatriate himself under Internal Revenue Code S. 7701(b)) and subject himself to the S. 877A “Exit Tax” provisions?
This is another in a series of posts on the “tax treaty tiebreaker” (which is a standard provision in most U.S. tax treaties). “Tax treaty tiebreakers” are rules that are used to assign a person’s “tax residency” to one country when an individual is a “tax resident” of both countries. In the context of U.S. tax treaties, “treaty tie breaker” rules are used when an individual is both:
1. A “U.S. person” for tax purposes (U.S. citizen or U.S. resident); and
2. A “tax resident” of another country.
It is very common to use tax treaties to assign “tax residency” to a country when an individual is  a tax resident of more than one country.
For example, Article IV of the Canada U.S. tax treaty provides for a rule to assign an individual’s “tax residency” to either Canada or the United States when an individual is a “tax resident” of Canada and and a tax resident of the the United States.
The “savings clause” prohibits U.S. citizens from using the “tax treaty tiebreaker” from avoiding being a “tax resident” of the United States.
Article IV of the Canada U.S. tax treaty includes:

2. Where by reason of the provisions of paragraph 1 an individual is a resident of both Contracting States, then his status shall be determined as follows:
(a) he shall be deemed to be a resident of the Contracting State in which he has a permanent home available to him; if he has a permanent home available to him in both States or in neither State, he shall be deemed to be a resident of the Contracting State with which his personal and economic relations are closer (centre of vital interests);
(b) if the Contracting State in which he has his centre of vital interests cannot be determined, he shall be deemed to be a resident of the Contracting State in which he has an habitual abode;
(c) if he has an habitual abode in both States or in neither State, he shall be deemed to be a resident of the Contracting State of which he is a citizen; and
(d) if he is a citizen of both States or of neither of them, the competent authorities of the Contracting States shall settle the question by mutual agreement.

It is clear that the “tax treaty tiebreaker” provision does NOT exclude Green Card Holders from it’s application. In fact, the impact of the “tax treaty tie breaker” may be the reason why the Canada Revenue Agency advises that “Green Card Holders” are NOT U.S. residents for FATCA reporting purposes.
The application of the “tax treaty tiebreaker” makes one a “nonresident alien, WITH RESPECT TO INCOME TAXATION, for U.S. tax purposes but NOT for other purposes (including FBAR and other information returns).
The “nonresident alien” and the 1040NR
Nonresident aliens file a 1040NR. A “nonresident alien” filing a 1040NR is filing to report and pay tax on income connected to the United States. A 1040NR is NOT used to report “non-U.S. income”. General information for the 1040NR is here. IRS Publication 519 – The U.S. Tax Guide For Aliens” is here.
Possible advantages for a “Green Card Holder” using the “tax treaty tiebreaker” to file the 1040NR
1. A Green Card Holder, by virtue of the “tax treaty tiebreaker”, would NOT be subject to U.S. taxation on “foreign income” which includes Subpart F income and PFIC income.
2. A Green Card Holder, by virtue of the “tax treaty tiebreaker”, would NOT be required to file Form 8938, Form 8621 and is subject to modified reporting requirements for Form 5471.
A reminder …
A Green Card Holder, using the “tax treaty tiebreaker” IS still a “U.S. Person”. He is a “U.S. Person” who is deemed to NOT be a U.S. person for the limited purposes of the “tax treaty tiebreaker”. He is a “U.S. Person”, who is NOT treated as a “U.S. Person” and  who is therefore able to file a 1040NR.
There are millions of “U.S. persons” (citizens and Green Card Holders) abroad who have not been filing U.S. taxes
Many of them are “coming into compliance” using the IRS Streamlined Foreign Offshore Program. As a general principle, “streamlined” is NOT available to “nonresident” aliens. This makes sense. After all, a “nonresident alien” is NOT a “U.S. person” for tax purposes.
Is “streamlined” available to a “U.S. Person”, who is filing a 1040NR, because he is treated as a “nonresident” pursuant to the “tax treaty tiebreaker”?
I suggest the answer comes from the instructions for streamlined which include:
“Eligibility for the Streamlined Foreign Offshore Procedures
In addition to having to meet the general eligibility criteria, individual U.S. taxpayers, or estates of individual U.S. taxpayers, seeking to use the Streamlined Foreign Offshore Procedures described in this section must: (1) meet the applicable non-residency requirement described below (for joint return filers, both spouses must meet the applicable non-residency requirement described below) and (2) have failed to report the income from a foreign financial asset and pay tax as required by U.S. law, and may have failed to file an FBAR (FinCEN Form 114, previously Form TD F 90-22.1) with respect to a foreign financial account, and such failures resulted from non-willful conduct. Non-willful conduct is conduct that is due to negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law.”
Let’s focus specifically on this part of the requirements:

“(2) have failed to report the income from a foreign financial asset and pay tax as required by U.S. law,”

If one is filing a 1040NR, then one is reporting ONLY U.S. source income. The whole point of the 1040NR would be to NOT have to report income from foreign financial assets. Think of the specific examples of Subpart F income and PFIC income.
Therefore, (although I will confess to never having analyzed this in terms of the streamlined rules) I suggest that one could NOT use the Foreign Offshore streamlined program to file the 1040NR.
It’s NOT that Green Card Holders who use the “tax treaty tiebreaker are NOT “U.S. Persons”. It’s that filing a 1040NR means that there is no reason to report income from a foreign financial asset (meaning that one fails the eligibility test for streamlined)!
John Richardson